Technology, Markets, & Global Finance by Paul Barsch

In the Future, Will Software Be More Important than Hardware?

From talent wars going on in Silicon Valley for software engineers, to the hundreds of thousands of new smartphone applications coming online, it’s not far-fetched to believe that software rules the world today and will continue to rule in the future. However, some hardware makers strongly disagree- that it’s the physical design, construction and production of the device, machine or infrastructure that will take precedence. Who holds the future – hardware makers, software makers—or both?

Flickr for android, courtesy of Flickr.

A Financial Timesarticle by Andrew Keen highlights a brewing battle between hardware and software makers for investor dollars. Both sides believe that they are the smarter investment for the long run. And both have a point.

First, it’s tempting to see hardware manufacturing as nothing more than something that should be outsourced. After all, companies such as Amazon source the production of the Kindle to offshore manufacturers, and it’s commonly understood that most large computer companies leave production of machines to Chinese/Taiwanese contract manufacturers such as Flextronics, FoxConn and others.

However, increasingly companies such as CPU manufacturers and tablet makers are taking some of these manufacturing capabilities in-house, especially as product complexity increases and integration between software and hardware becomes more commonplace.

In addition, taking manufacturing capabilities in-house means less bureaucracy in terms of working with an outsourced vendor, arguably higher accountability (no one to blame for failures), and more control over manufacturing processes. Net, net in many cases the higher a product moves up the value chain in terms of complexity and integration, the more it makes sense for companies to assert authority, control and accountability for manufacturing operations—sometimes all the way to the point of assuming full responsibility for hardware production.

The counter argument however is hardware will always be a commodity. Designs and specs can be written so that just about any respectable contract manufacturer can produce a product. The real value, say software makers is the design of user interfaces all the way to behind the scenes algorithms responsible for executing complex processes.

Ultimately, the most likely answer of who will win the future (hardware vs. software) is that there’s a place for both camps. For example, it’s the integration of commodity hardware with advanced software that seems to be the best fit for many companies looking to acquire analytics capabilities.

This is evidenced by the data warehouse appliance trend of an engineered and integrated solution stack of hardware and software coupled with services for implementation, maintenance and operations. These solution stacks are architected, performance tested, certified and supported. And they usually come from a single vendor responsible for the entire end-to-end package.

In the meantime, we have a strong debate. VC’s like Marc Andreessen say software companies are primed to “take over large swathes of the economy”. Hardware makers claim the user experience in terms of design, touch and feel is more relevant than ever. What say you?